SBA Communications Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 29, 2024

There are 19 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SBA Second Quarter Results Conference Call. At this time, all participants are in a listen only mode. And later, we will conduct a question and answer session. Instructions will be given at that time.

Operator

And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, VP of Finance, Mark DeRussy. Please go ahead.

Speaker 1

Good evening, and thank you for joining us for SBA's Q2 2024 Earnings Conference Call. Here with me today are Brendan Kavanaugh, our Chief Executive Officer and Mark Montagnier, our Chief Financial Officer. Some of the information we will discuss on this call is forward looking, including, but not limited to, any guidance for 2024 and beyond. In today's press release and in our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, July 29, and we have no obligation to update any forward looking statement we may make.

Speaker 1

In addition, some of our comments will include non GAAP financial measures and other key operating metrics. The reconciliation of and other information regarding these items can be found in our supplemental financial data package, which is located on the landing page of our Investor Relations website. With that, I will now turn it over to Brendan to comment on the Q2.

Speaker 2

Thank you, Mark, and good afternoon. The second quarter was another solid one with good execution operationally and financial results in line with our expectations. Accounting for recent weakening in foreign exchange rates, we have modestly lowered our full year outlook for most financial measures. However, on a constant currency basis, we have slightly increased our projected full year results. The year has largely unfolded as we had expected.

Speaker 2

Steady carrier activity across our markets, but no material inflection in new lease and amendment executions thus far into the year. In the U. S, we have continued to receive increased inquiries from our customers, which is a good sign. But to date, we have only seen a modest increase in new business executions. Looking out over the next several years though, we are very excited about the prospects for further increased demand.

Speaker 2

Mobile network consumption continues to grow at a very healthy pace, adding strain to existing networks. The offering of fixed wireless access by all 3 of our major customers will only add to this network strain. I have mentioned it before, but I believe it bears repeating. The average fixed wireless access user consumes 15 times to 25 times the data that a typical mobile wireless user consumes. As a result, the equivalent mobile subscriber additions to our customers' networks is significantly higher than it has been in the past.

Speaker 2

This phenomenon will require continued network investment by our customers to keep pace with the demand. And all have publicly discussed plans to continue to grow fixed wireless access subscribers over the next several years. We also expect that the eventual incorporation of new generative AI capabilities into handsets will further increase network consumption. In addition, the percentage of our existing leases with the big three carriers that have been upgraded with mid band 5 gs spectrum still remains at just over 50%, leaving a significant growth opportunity ahead of us. Varying rates of 5 gs progress among our largest customers creates competitive pressures that we believe will also be a driver of future network investment just as it has been in past cycles.

Speaker 2

Incidentally, mid band 5 gs spectrum upgrades in our international markets are at even lower percentages of completion than in the U. S. Beyond all of these demand oriented drivers, we expect increased network spending driven by 5 gs coverage commitments made in connection with past regulatory approvals. Some of these commitments not only require coverage of pops, but also minimum downlink speeds. This means that denser build outs and expansion into areas not previously prioritized, particularly rural areas, will become more important as deadlines approach.

Speaker 2

We believe we are well situated to assist our customers in meeting their objectives with both our assets and our services support solutions. We are in the business of long term assets and long term customer relationships. Things don't change materially overnight, but the signs of numerous demand drivers are all there and we are confident in our long term organic growth prospects. In our services business, we had another good quarter as well. Revenue was up 15% from the Q1 and our gross profit contribution was ahead of our internal expectations.

Speaker 2

We have lowered our full year outlook for services revenue by $10,000,000 at the midpoint due to a lower anticipated level of construction work, although we still expect to increase that number in the second half of the year over first half levels. Notwithstanding this lowered revenue outlook, we have not reduced our expected gross profit contributions to our full year adjusted EBITDA outlook as we continue to secure higher margin work. Our services teams continue to perform very well for our customers, helping them to significantly reduce their deployment cycle times. Internationally, results were also in line with expectations in the prior quarter. Although we did see a pickup in new leasing activity during the quarter, increasing the contribution to full year revenue from new leases and amendments.

Speaker 2

Each of our markets has opportunities for increased organic growth as new spectrum and new generations of wireless technology are rolled out. Challenging macroeconomic factors and imbalanced market share among mobile network operators in some of our markets has led to consolidations and increased network rationalizations presenting some near term challenges, but ultimately bolstering the strength and sustainability of customers' prospects. We continue to work toward enhancing our own market positioning and our alignment with the leading carriers in each of our markets. We believe our efforts will ultimately enhance the long term strength and stability of our cash flows and increase our opportunities to capture incremental organic leasing revenue growth. During the Q2, we also continued a balanced approach to capital allocation with a mix of portfolio expansion, stock repurchases, dividends and debt reduction.

Speaker 2

I anticipate that we will continue to balance our capital allocation for the remainder of the year. Since our last earnings call, we have largely focused on debt reduction and have reduced our outstanding revolver balance to just $30,000,000 as of today. We have some upcoming debt maturities that we anticipate refinancing in the near future. But until that time, we will likely continue to prioritize debt reduction and liquidity. The debt markets are wide open to us and have also improved over the last few months as we have seen some tightening of rates.

Speaker 2

Our quarter end net debt to adjusted EBITDA leverage ratio was 6.4 times. So while our current priority is debt reduction, we have preserved the flexibility to take advantage of material value enhancing investment opportunities if they arise. We continue to explore and stay educated about the numerous asset portfolios available throughout our markets, but we'll retain an informed increased cost of capital has certainly underscored the emphasis we place on precise valuation and strategic rationale. I still believe we are the best in the business at valuing, integrating and operating tower assets. So I believe we can continue to create value through asset acquisitions.

Speaker 2

We have a great long term steady cash flow, low risk business. The underlying strength of wireless dependent products and services will continue to drive increased needs for enhanced infrastructure solutions and we have positioned ourselves as a key partner for our customers in meeting the challenges of addressing those needs. Before turning it over to Mark to share some more specifics on our Q2 results, I'd like to thank our team members and our customers for their contributions to our success. With that, I'll now turn things over to Mark, who will provide additional details.

Speaker 3

Thank you, Brendan. Our second quarter results were in line with our expectation. 2nd quarter domestic same tower revenue growth over the Q2 of last year was 5.9% on a gross basis and 2.3% on a net basis, including 3.6 percent of churn. Dollars 8,200,000 of the 2nd quarter churn was related to spring consolidation churn. International same tower recurring cash leasing revenue growth for the 2nd quarter, which is calculated on a constant currency basis was 2.7% net, including 5.3% of churn or 8% on a gross basis.

Speaker 3

In Brazil, our largest international market same tower growth organic growth was 6.4% on a constant currency basis. As compared to the previous quarter and full year 2023, the reported international growth rate continued to be impacted by declining local CPI link escalator in Brazil. We continue to see strong organic lease up in our international market. Total international churns remain elevated in the Q2 due mostly to previously announced carrier consolidation. During the Q2, 79% of consolidated cash site leasing revenue was denominated in U.

Speaker 3

S. Dollars. The majority of non U. S. Dollar denominated revenue was from Brazil with Brazil representing 15.1% of consolidated cash site leasing revenues during the quarter.

Speaker 3

Let me now cover our revised outlook for 2024. Excluding the impact of weakening foreign currency assumptions, we slightly increased our full year outlook for site leasing revenue, total cash flow, adjusted EBITDA, AFFO and FFO per share as compared to our prior outlook. The devaluation of the Brazilian real versus the U. S. Dollar is estimated to have a negative impact to our site leasing revenue of approximately $19,000,000 in 2024 versus our prior forecast in May.

Speaker 3

With regard to site development revenue, we are forecasting lower construction volume for the full year and therefore have lower our fully ARPU by $10,000,000 However, we have not reduced our expectation for gross profit contribution for this business as we continue to execute well and secure higher margin work. Please also note that the outlook does not assume any further acquisition beyond those as of today that are already under contract and expected to close by year end. We also do not assume any share repurchase beyond what was already completed so far this year. However, it is possible that we invest in additional assets or share repurchase or both during the year. Our outlook for net cash and service expenses and for FFO and FFO per share and I assume at September 1 refinancing of the $620,000,000 ABS tower security scheduled to mature in October 2024.

Speaker 3

We assume that refinancing have a fixed rate of 6% per year. Actual rate and timing may vary from these assumptions. As a result of these revised financial assumptions and projected lower cash taxes, our full year FFO per share outlook has increased by 0 point 9 dollars excluding the impact of FX changes. Let me now turn the call over to Mark.

Speaker 1

Thank you, Mark. Our balance sheet remains strong and we have ample liquidity. Our current leverage is 6.4 times net debt to adjusted EBITDA remains near historical lows. Our 2nd quarter net cash to interest coverage ratio of EBITDA, the net cash interest expense remains very strong at 5.2x. Our weighted average maturity is approximately 4 years with an average interest rate of 3% across our total outstanding debt.

Speaker 1

Including the impact of our current interest rate hedge, the interest rate of 97% of our current outstanding debt is fixed. We continue to use cash on hand to repay amounts outstanding under the revolver. And as of today, we have a $30,000,000 balance under our $2,000,000,000 revolver. In addition, during the quarter, we declared and paid a cash dividend of 105 $300,000 or $0.98 per share. And today, we announced that our Board of Directors declared a 2nd quarter dividend of $0.98 per share payable on September 18, 2024, to shareholders of record as of the close of business on August 22, 2024.

Speaker 1

This dividend represents an increase of approximately 15% of the dividend paid in the Q2 of 2023. And operator, with that, we are ready to open up the call for questions.

Operator

And our first question will come from David Barden with Bank of America. Please go ahead. Hey guys, thanks so much for taking the question.

Speaker 2

I guess the

Speaker 4

first question if I could, maybe either for I don't know who this question goes to. Just talking a little bit about the evolution of the financing market. There's been a lot of movement in the last few weeks. You guys took some steps to try to maybe pre finance the term loan coming due in 2025. I'm wondering if you could kind of comment a little bit about what the landscape looks like and how the rates that you are being presented look relative to what they might have looked like a month ago?

Speaker 4

And then if I could, the second one is just for our just as a reminder, Mark or Brendan, when we think about how you guys choose to budget FX into your guidance with the real blowing out to like 560, are you looking at forward rates? Are you looking at spot rates? How are you deciding what you're going to bake into guidance, which seems to be the biggest moving part in what happened this quarter? Thanks.

Speaker 2

Yes. I'll jump in 1st, David, and then Mark can add in anything that he thinks I need to that I missed on the financing market. The market certainly has been improving. Obviously, there's a greater expectation in terms of rates. The next financings or refinancings that we have to do are of ABS debt that's outstanding.

Speaker 2

And we expect to do that with a like instrument and those instruments are typically priced as a spread to treasuries. So the improved general sentiment around forward rates affects the treasuries and that obviously is helpful to the potential pricing of those financings that we have ahead. But just beyond that, there's a high demand for the type of paper that we issue. And I think there's opportunity to see that continue to improve moving forward. As it relates to the term loan that we did before, it's floating rate.

Speaker 2

So really that didn't change much and we had a hedge in place. So obviously an improving rate environment will directly help that particular instrument, particularly when the hedge falls away next year. So on the second question regarding the FX forecasting, we typically will use as we go into the year a forward market. Like we'll look at what are the general consensus of projections for that year, primarily around Brazil, around all of our foreign currencies, but Brazil is the biggest one. And we will usually peg it to that.

Speaker 2

Unfortunately, those projections have not turned out to be right thus far this year and the currency has weakened much more than was originally expected. And the rate that we're using now for the balance of the year is pretty close to spot, which is also in line generally with projections, but obviously, it's an inexact sign. So we would prefer to try and nail it right on and not have to change it, but that's a hard task.

Speaker 4

Okay, great. Thank you for the color, Brendan.

Speaker 2

Sure.

Operator

And our next question comes from Simon Flannery with Morgan Stanley. Please go ahead.

Speaker 5

Great. Thank you very much. Good afternoon. First, on M and A, you put this comment in about taking advantage of material value, enhancing investment opportunities if they arise. Has something changed that you're looking more closely at that now, maybe giving you get through some of this financing?

Speaker 5

Or is it just consistent with where you've been before? And any thoughts around how you're thinking about geographies? I know you talked before about Europe being interesting, but is it mostly developed market or U. S. And Europe?

Speaker 5

Or would you look at expanding in existing or new developing markets? Thanks.

Speaker 2

Sure. Yes. The comment about material value enhancing, obviously, that's not different than what we've done in the past. I think the key difference now is that with our leverage having come down to a much lower place, actually the lowest place it's been in our history, it allows for flexibility that if we saw something of material size that we thought would be value enhancing to be able to transact that maybe easier than it would have been in the past. But our approach is not that different.

Speaker 2

Obviously, cost of capital is higher and so that affects what we can pay or where we see value in terms of the opportunities that are out there. But it's our goal and intention to hopefully find opportunities that are accretive and add other value, even strategic value in terms of positioning to the extent it's in international markets, for example. And I think you should expect that we're constantly looking and that hopefully we will find those opportunities just as we've done in the past. In terms of the where, it really depends. I mean, mostly we're focused on the markets that we're in, but we kind of scour the globe and we look at everything that's available.

Speaker 2

We look at opportunities that are in markets we're not in, because sometimes we see things that we think will fit very well and will be long term value creating. So there's not a specific target, but to the extent that we can add in markets where we already are, there's obviously some synergies associated with the operations around that.

Speaker 5

And do you think we're getting to a better place between private and public multiples because it seems like there's been quite a spread there for a while.

Speaker 2

Yes. I think, it's moving more in the right direction than it has in the past few years. Specifically, internationally, I would say we're seeing that constrain meaningfully in terms of the difference between the two. Domestically, it's probably less so. And I think that's mostly a function of just limited supply in the U.

Speaker 2

S. And obviously, it's kind of the prime tower market. But even in the U. S, I'm starting to see some indications that maybe that gap will narrow a little bit.

Speaker 5

Great. Thanks a lot.

Operator

And our next question comes from Jim Schneider with Goldman Sachs. Please go ahead.

Speaker 6

Good afternoon. Thanks for taking my question. First of all, could you maybe tell us how you're thinking about the various international markets where you have a presence already today? And the attractiveness of staying in markets where you arguably are subscale relative to getting bigger in ones where you already have meaningful presence?

Speaker 2

Sure. Yes. We mentioned it at the beginning of the year on our first call of the year about our approach and that we're doing a review kind of all of our not only our international markets, but all of our business lines. But specifically as it relates to our international markets, what we've determined as we kind of look through it is it definitely is an advantage to be a greater scale to be a more relevant to your customers in the markets that you're in. And in some places we are in that position and other places we are not.

Speaker 2

And so to the extent that we can solve that issue through expansion in some of those markets, we would like to do that. If we do not see a reasonable way to do that, then we may look to move on from certain markets as we've done at least with 1 in the past. So we're continuing through that exercise. And even though there's no real update on that at the moment, it's not because there's not progress being made. There is in fact a lot of progress being made, but we're not at a point to be able to discuss specifics yet, but we will be down the road.

Speaker 2

So ideally, we'll look to be of a good scale in each of the markets that we're in. And we'll also look to be aligned with the stronger carriers that are operating in those markets as well.

Speaker 6

That's helpful. Thank you. And then maybe as a follow-up, relative to the downtick in site development expectations for the year, I know that's not impacting the gross profit line because you're picking more profitable business. But can you maybe just comment on what that signifies in terms of domestic care activity broadly speaking and whether that's any kind of leading indicator of a more of a unit environment or is that just you being selective in the business you're taking from them?

Speaker 2

Yes. I don't it's not really signifying much. It is the mix of work that we're doing is a little bit different. It's a little more oriented towards consulting or site development services type of business as opposed to construction. So the top line volume ends up being lower, but the margin ends up being higher on that.

Speaker 2

And our outlook, although it is lowered in total for the year, and that's really based on the first half of the year honestly, we expect the second half of the year and it's implied in the number to be higher in terms of the volume than the first half of the year. So I wouldn't say that it's necessarily a sign of it being more muted. I think it's just, the mix of work as much as anything.

Speaker 6

Thank you.

Operator

And our next question comes from Michael Elias with TD Cowen. Please go ahead.

Speaker 7

Great. Thanks for taking the questions. 2, if I may. First, there are a few assets on the market in Europe right now. I'm just curious at a high level, could you give us your thoughts philosophically on the European tower market?

Speaker 7

Maybe if you could compare and contrast the opportunities and headwinds for that market? And then my second question would be, just based on everything you're seeing domestically at the moment, do you believe we can see domestic new leasing in 2025 be up versus 2024 levels? And kind of if not, when is the drop dead for us to see a pickup in activity for it to really be reflected in 2025? Thank you.

Speaker 2

Sure. Just I'll do the second question first. I mean, we're obviously not in a position today to give outlook on 2025. I don't really want to get into that too much. And so much of what 2025 will look like is going to be based very heavily on what we see happen in the second half of twenty twenty four.

Speaker 2

So I would say just hold tight and we'll see how that goes. If we don't see any real uptick in carrier spending in the second half of twenty twenty four, then it likely would not be up. But there's still a lot of that story to be written. So we'll see where it goes. On your first question on Europe, we obviously don't have any operations in Europe.

Speaker 2

So my views and opinions are based on just looking at it from the outside in. We've explored opportunities as they've come up in Europe. And I think the positives there are obviously you've got a very stable type of market in terms of currency, in terms of rule of law and regulations. It's very established, but it's also slow growth and I think there are some churn risks that exist there, particularly as you see carriers consolidating their network operations. And so any decision to expand into Europe will be opportunity specific and depending upon the valuation as much as anything and what we see as the specifics around that particular portfolio if we decide to go that route.

Speaker 2

So we look at everything that comes available as I said earlier and if we see something we'll explore it and if we don't then we're perfectly content where we're at.

Speaker 7

Great. Thanks for the color.

Operator

And our next question comes from Richard Choe with JPMorgan. Please go ahead.

Speaker 8

Just wanted to ask on the leverage. It's continued to go down and it seems like it will continue to trend that way, given if there's nothing out in the M and A environment. How low could we see that leverage go to over the foreseeable future? Thank you.

Speaker 2

Sure. Well, it's not our intention to necessarily see it continue to go lower. That's really going to be a function of the alternative uses of capital. So, I can't give you an exact number. I think depending on the opportunities that come along for investment into the business, into assets, that will be the main driver of where leverage goes.

Speaker 2

If we see an opportunity to expand in a way that we think will be value additive to us long term, then you may see leverage tick back up. If we don't see that, then leverage will probably continue to decline. Eventually, we'll have to explore what that means in terms of investment grade, but I don't think we're quite there yet.

Speaker 8

It seems like the opportunities have been a little bit slow in the first half of this year. Do you think things will pick up in the second half and as we go into next year?

Speaker 2

You mean opportunities for asset acquisitions?

Speaker 8

Yes.

Speaker 2

Yes. I would not say that they are slow. I would say that nothing has been secured, certainly signed up or closed as of yet, that's of a major scale. But there are a lot of different portfolios and opportunities out there. So, I think my M and A team would not agree with that it's slow because they've been very busy.

Speaker 2

But, what that ends up resulting in will depend on whether we can find something we like at terms we find attractive.

Speaker 8

Great. Thank you.

Operator

Sure. Our next question comes from Ric Prentiss with Raymond James. Please go ahead.

Speaker 9

Thanks. Good afternoon, everybody.

Speaker 2

Hey, Ric.

Speaker 9

Hey. When you get quarters like most recently with the FX rate, does it cause you to pause a little bit and think why are we so heavily involved in some of these international countries? Or how should we think about what moments like this when you have to pull down the guidance because of FX to David's questions earlier? How do you kind of square that with where you want to see the company go longer term?

Speaker 2

Yes. I think, Rick, it's a obviously, we have what we have. We have a big embedded business, particularly in Brazil, and it's got that risk and we've seen it in past cycle too. And of course, it's disappointing to us to passed a lower outlook based solely on that particular issue. I think it does impact or influence the way that we think about the mix of our asset base and our revenue base to have something that's a little more stable.

Speaker 2

I think at the beginning of the year when we're talking about our overall goals in the way that we look at things. Stability was kind of a key point in that. And obviously, this particular item introduces an element of instability that I would prefer not to have. However, we have a very good business down there. There's a lot of good things that are going on in Brazil.

Speaker 2

And so trying to navigate through the right way to reduce that exposure probably comes through increased exposure in other places that perhaps have more stable currencies. So we'll see if we can do that. But I would say that it at least influences us to not get too overextended to some of these currencies that have greater volatility.

Speaker 9

Makes sense. And you had a comment earlier that the U. S. Is still about 50% done on the mid band deployment, varies by carrier significantly possibly. And international as well, Laura, can you give us kind of a spot number?

Speaker 9

Where are the international markets on kind of that mid band or 5 gs spectrum deployment?

Speaker 2

Yes, I do have that and it does vary by market. And I think maybe it's something we can share with you offline because I don't have it right in front of me. It's kind of a mix, but I would say as a this is me ballparking it based on what I've seen for each country that we've got. You're looking at somewhere in the probably 25% or less on average across all of the existing international markets that we're in.

Speaker 9

Okay. And then, Simon asked a question about public versus private multiples. Take that a little bit further and what are the pros and cons of maybe selling a piece of your domestic business if private multiples stay above public multiples, I. E. American Tower did it with the Telcius European, did it with core data centers.

Speaker 9

So it's kind of a way to bring capital in, it could be used to address the balance sheet. But kind of your thoughts, pros and cons on kind of that disparity between public and private and that maybe you could sell buy high, sell low, kind of find a place to say what can we get to mark to market?

Speaker 2

Yes. I think that's never been a big part of our goal is to shrink through selling off assets. I think certainly partnerships that bring in partners is a possibility that we would consider. But in terms of selling assets, I would say it's on the table, Rick, if in fact the valuations are just at a level that we believe is clearly well above the credit that we're getting for those assets. But there's a lot of logistics that we would have to work through as well.

Speaker 2

I mean, we obviously have financing structures, we have MLA agreements, we have a number of different things that would impact our ability to kind of hive off assets here in the U. S. But I wouldn't rule it out altogether. I just would say that it's not at the top of the list ideally.

Speaker 9

Makes sense. It's complicated, but something should be at least studied.

Speaker 2

Yes. And maybe just one other thought on that as I'm thinking about it. We always talk about the disconnect, and I think the inference is always that disconnect is that the private multiples are too high. I might flip that around and suggest that the public multiples perhaps are too low. So it's not when it closes, which way it closes will obviously have an impact on how you feel about that sort of an exit.

Speaker 9

Exactly. And we agree with that and that sometimes a mark to market wakes the public up to what the real value is. I appreciate it guys. Thanks.

Operator

Our next question comes from Jon Atkin with RBC. Please go ahead.

Speaker 10

Thanks. Two questions. One, anything about the build to suit opportunity, given your recent run rate of domestic build to suit? And anything that you see that might cause you to want to get a little more aggressive on that? And then on the leasing side, I think I heard you say increased interest, some of it due to mandated kind of world build outs.

Speaker 10

Anything attributable to FWA? You mentioned that in your remarks, but anything yet apparent in your leasing pipeline that you would attribute to fixed wireless access? And then I got a follow-up. Thanks.

Speaker 2

Okay. Yes. On the BTS, I think you said, if I heard you correctly, you were talking specifically about domestic builds, John?

Speaker 11

Yes.

Speaker 2

Yes. I mean, we would like to do more of those certainly. I mean, obviously, you've seen our numbers over the last few years. They haven't been particularly heroic. And a lot of that's because the carriers have tended to go to low cost providers because that's a choice that they have, because there's so much capital out there supporting, this particular industry.

Speaker 2

So we would like to do more. We found the way to do that though is to secure high quality locations to get out ahead of where coverage needs are and secure those opportunities in more of a strategic manner as opposed to pure build astute, although we do some of those build. But yes, I'd like to be more aggressive on it for sure. I just don't know if we're going to get to numbers that really move the needle too much. In terms of our backlog and the fixed wireless access influence on It's hard for us to say exactly, because fixed wireless access is typically using the 5 gs oriented mid band spectrum that is being deployed more broadly.

Speaker 2

And so I think to date most of these fixed wireless subscribers have been supported through excess mid band spectrum that's been deployed capacity on that spectrum that's been deployed already. But it's starting to get closer to a point where that's going to be harder to do because of the amount of consumption for that particular product. So I can't draw a direct line to it yet, but we see signs that the customers' networks are going to become more and more congested as a result of that product and that ultimately is very good for us.

Speaker 10

And then AMX seems to have kind of increased as a percentage of your international leasing. Anything around their activity level? Or is it a matter of other operators maybe moderating their activity? Any color there?

Speaker 2

Yes. It's actually two things. It's 1, they have been very active. They've probably been our most active leasing customer broadly across our international markets. But 2, with the FX decline in Brazil, they are obviously a tenant there, but they have a presence in a number of our other markets.

Speaker 2

So they're not as affected as some of the other carriers on that list that we share. So their percentage just by default comes up as a result of the FX shift. And then lastly, I've got

Speaker 10

a question on the balance sheet. Is it would it make any sense to utilize your revolver to pay down the ABS set and then see if kind of what happens in terms of Fed cuts later in the year and wait to issue ABS after that?

Speaker 2

I mean, it could, although it's you're really taking a little bit of a bet because if you're using the ABS market to refinance the existing ABS debt, you are using a benchmark rate that implies a certain expectation around the rate. It's not directly affected by when the Fed cuts, if they cut. So if you were to say, I'll hold off and take my chances and do it down the road, the revolver will be priced at a higher rate. So for the time being, you will be paying a much higher rate than you otherwise would. And so does it make sense?

Speaker 2

Plus we have other financings maturing, one big one in January and then others in January of 26. So you can only do that for a limited period of time. So I'm kind of inclined not to think about it that way. But the good news is we have tremendous liquidity and we can be flexible if necessary.

Speaker 1

Thank you.

Speaker 2

Sure.

Operator

And our next question comes from Michael Rollins with Citi. Please go ahead.

Speaker 12

Thanks and good afternoon. I had two questions. First, with respect to the domestic carrier conversations that you referenced, can you share if those are related to the typical a la carte business that you've seen from your carrier customers? Or are these discussions possibly getting you closer to signing additional comprehensive MLAs with additional national wireless carriers? And second, is there any change in timing or magnitude of the anticipated multi year churn from mergers and rationalization for both the domestic and the international segments?

Speaker 12

Thanks.

Speaker 2

Sure. Yes, I mean the conversation we're in regular conversations on a daily basis at all different levels with our carrier customers. And so conversations cover a wide variety of topics. And those certainly include the potential for larger, broader deals. But I wouldn't say that that is the sole focus for the time being.

Speaker 2

We're operating under the existing agreements that we have in place. We do have existing MLAs in place. Some of those involve a la carte type of arrangements, but they define those pretty well. So we continue with business as usual on that front and try to figure out where our customers could use our help the most in terms of their broader bigger picture initiatives. And if that's best served through an MLA, we're open to that as a possibility.

Speaker 2

On the timing and the magnitude of the churn from the consolidations, hasn't really changed too much. I think we tweaked our churn outlook in the U. S. Up just slightly and that had to do basically with some the timing of some of the Sprint churn being slightly earlier. But these are really fairly small changes in terms of the overall expectation, for instance, around Sprint.

Speaker 2

It hasn't changed from what we've given out in the past. And I think it was reiterated by Mark in his comments earlier today. And internationally, that's generally the case as well. The one thing that could change that is if we were to reach some sort of agreement, specifically with Claro around their Oi wireless overlap in Brazil that pulled forward or changed the timing for some of that, that could obviously have an impact. But as of today, it continues along the same path as we previously laid out.

Speaker 13

Thanks.

Operator

Our next question comes from Brandon oh, I apologize. Our next question comes from Nick Del Deo with MoffettNathanson. Please go ahead.

Speaker 14

Thanks for taking my questions. First, regarding the pickup in new leasing activity overseas that you cited, can you drill down on that a little bit? Is it coming from a particular market or markets? Does it feel like a blip or the start of something more sustained? Any color there would be great.

Speaker 2

Yes. It's I would say that it was across a number of our different markets. I mentioned earlier that Claro was busy. They were a big driver of that. And yes, I can't say for sure whether it's to be sustained, but our backlogs continue to be pretty strong.

Speaker 2

And so I hope that in fact it will be. I think there's a lot to do as we look at the need that these carriers have. It's really more of a financial question, I think, than anything else. So I think it's a good sign to see it ahead of the pace that we expected to be at this point. And at this point, I think that that will continue throughout the balance of the year and we'll let you know where we are as we get into next year.

Speaker 14

Okay. Okay. And then, to follow-up on some of the M and A questions, there might be a couple of good sized portfolios for sale in the U. S. I guess given your current size, 17,500 towers, do you think there are still meaningful strategic or cost efficiency or other benefits to having greater scale in the U.

Speaker 14

S? Or do you feel like given your scale, for all practical purposes, there aren't scale driven benefits to be had from potential deals of those sizes?

Speaker 2

I think from an operational standpoint that the scale benefits are very limited because we're pretty streamlined at this point. I think there are some certainly, but I think it's relatively small part of any large scale deal that we would do here in the U. S. But there probably are some benefits in terms of just being able to help our customers achieve some of their broader reaching goals. If we have a bigger portfolio, that does make a little bit of a difference, I think.

Speaker 2

But I don't think it's a major factor. I think ultimately, they'll need the sites that they need and we have a lot of great sites and a lot of great locations that are frankly, ones that can't be duplicated. So it's something that we would think would be marginally beneficial from a strategic standpoint, but marginally being the keyword.

Speaker 14

Okay. Appreciate that. Thanks, Brandon.

Operator

And our next question comes from Brandon Nispel with KeyBanc. Please go ahead.

Speaker 12

Thanks for taking the questions. Brandon, you mentioned the increase

Speaker 2

in the modest increase in your business execution. Hey, Brandon. Brandon, I'm sorry, you were muffled there. I couldn't really hear what you said.

Speaker 15

Brandon, can you hear me okay?

Speaker 2

Yes, that's better. Thanks. All

Speaker 15

right. So, Brendon, you had mentioned increased inquiries and modest increase in new business execution in

Speaker 16

the U. S. Can you say

Speaker 15

the same for your backlog of lease applications? Is it up or down versus time last year? Then as we look at the guidance for the rest of the year, it looks like from a new leasing standpoint in the U. S, it does imply lower in the second half versus the first half. You're at the point where you can say with confidence that leasing has troughed or is it potential that would see leasing below this $42,000,000 level for next year based on the application pipeline that you have?

Speaker 15

Thanks.

Speaker 2

Yes. I can't give you next year's numbers at this point. I would tell you that from an application standpoint, we have seen increases, each of the last couple of quarters, quarter over quarter continues to go up. So that's a good sign. But an application doesn't necessarily tell the whole story because you have to see how that plays through and what's the level of equipment that they're installing and so forth.

Speaker 2

I do think with the increases that we're seeing in terms of interest in applications that we'll see an opportunity to have greater executions as we move through the year, particularly into next year. But there's so much that still has to be has to play out for us to know what that does to next year's number that it's premature for me to say.

Speaker 15

Got it. And could I follow-up on the services guidance cut, last year and historically T Mobile has been north of 70% of that business. Can you say that the decline in services guide was broad, meaning more than one customer or was it concentrated in 1 customer? Thanks. Yes.

Speaker 2

I would say that it was broad in the sense that, it was across the customers that make up that revenue base, although we do have certain concentrations. So obviously, it's a greater absolute dollar amount from certain carriers. But there's nothing that stands out about that. It's really more as I said earlier, it's really more about the mix of work being a little more, SDS related instead of construction related.

Speaker 15

Got it. Thanks for taking the questions.

Speaker 2

Sure.

Operator

And our next question comes from Matt Niknam with Deutsche Bank. Please go ahead.

Speaker 17

Hey, guys. Thank you for taking the questions. Just two follow ups. First, I guess to the topic of carrier activity, any changes in activity or uptick in conversations with DISH? And then secondly, on the operational review of the business, I know it was a bigger topic last call and I know it sounds like there's more going on behind the scenes, but there's any initial findings or when we can anticipate more meaningful updates on that front?

Speaker 17

Thank you.

Speaker 2

Sure. On DISH, there's been we continue to have conversations. They actually do continue to sign leases with us, but there hasn't been any material inflection in that. And we're waiting to see how their plans evolve. If they evolve, I'm sure there are conversations ongoing in terms of their the deadlines around their commitments for coverage for next year and financing and a number of other things.

Speaker 2

But we're just here trying to be the best partner we can be to them on their needs and they continue to sign leases in places where they need it, but it's obviously at a lower level than it was a couple of years ago. So nothing really new there. On the strategic or operational review, mean, there's only so much I could say at this point because we've done a lot of work, but until we're ready to share with you specific takeaway specific actions that are being taken, it would be premature for me to talk about that right now. But I do think certainly by the end of the year, I would expect that there will be a number of things that we can share.

Speaker 4

Thank you. Sure.

Operator

Our next question comes from Brendan Lynch with Barclays. Please go ahead.

Speaker 18

Great. Thank you for taking my question. It seems on a number of fronts you're in sort of de risking mode, reducing leverage, considering going investment grade, exiting some non core markets. How should we think about your risk tolerance going forward over the next few years relative to what it's been over the past

Speaker 2

few? I think it will be an informed amount of risk. There's always some degree of risk, particularly when you're making decisions to invest capital and expand by buying or building new assets. So, I believe that all of the learnings that we have over the years and what we've seen in each of the markets where we operate make us better informed to understand the risk that we're taking on and to manage and frankly price that in any decisions that we make. So, I don't know that it's changed a lot.

Speaker 2

I think the knowledge that we have changes every day and that informs it, but our overall risk tolerance is probably not that different, just our education is a little different.

Speaker 18

Maybe just to dig in on that a little bit more. Obviously, there's been changes in the cost of capital and the opportunity set. But maybe you could talk about those dynamics also in the context of just the maturity of the market and how much risk you're willing to take to pursue the next level of growth that might be available?

Speaker 2

Yes. I mean, so much of the decisions around investments in the new assets is impacted by your view of the future of those assets in the markets and what are the MNOs in those particular markets going to be doing and what are their needs going forward. And I think almost in every case, when one tower company buys a portfolio instead of another, it probably comes down typically to their view of the future and one has maybe a slightly more favorable view than another and therefore they're able to see their way clear to pay a little bit more. And I don't think things are any different than that today. Obviously, the cost of capital being higher makes a difference, but it's higher for everybody.

Speaker 2

And I think that's what started to normalize. It started to make its way through the system, whereas before you had certain folks who were using capital that was priced at a much lower point and that was allowing them to continue on buying stuff at prices that were suddenly becoming not as attractive to some of us that were affected more quickly by the change in cost of capital. So I don't think it's any different. I think it's just as a matter of everybody adjusting to the cost of capital and then how you see your way clear to obtain the growth necessary on the assets that you're buying.

Operator

Great. Thank you for the

Speaker 2

color. Sure.

Operator

Our next question comes from Ari Klein with BMO Capital Markets. Please go ahead.

Speaker 12

Thank you. Maybe just going back to

Operator

the carrier inquiries you alluded to, is there

Speaker 12

any additional context you can provide as to how they've changed? And how typical or atypical is it for these conversations to ultimately materialize in better leasing?

Speaker 2

Well, they changed in the sense that at a given point in time a given market, a carrier has more or less initiatives, certain specific needs. They either have them or they don't in a given window of time. But that's not really different than the history of it. It's just a cyclical in different places. So I don't think that the conversations are necessarily that different.

Speaker 2

I think when they change more meaningfully is when there's a big initiative, a big project, a new spectrum band to roll out or a particular initiative that is carrier specific and that will lead perhaps to maybe a bigger scale agreement, that sort of thing. But the conversations inform our view on where they're going and allow us to better position ourselves in order to capture a greater percentage of the business that's going to come as a result of those initiatives.

Speaker 12

Thank you.

Speaker 2

Sure.

Operator

Our next question comes from Jonathan Sapien with New Street. Please go ahead.

Speaker 16

Thanks guys. It's Jonathan Chaplin. Two questions if I may. You mentioned earlier that if you didn't secure

Speaker 6

attractive assets

Speaker 16

that your leverage might continue to tick down. Of course, you could repurchase shares. And I think you also said earlier that you thought the public multiples are too low, your stock is undervalued. So there's a reason that leverage would tick down, but for asset acquisitions that don't include your own assets. It sort of indicates that you think it's probable that you're going to pick up a decent sized portfolio in the relatively near future, otherwise you'd be buying back stock?

Speaker 16

Or rather buying back stock and keeping leverage constant?

Speaker 2

Well, yes, I didn't say that we are definitely buying a material portfolio. I'd say that we are looking at all kinds of things that are available and some of those include material portfolios, But whether those happen or not remains to be seen. So sometimes you have to be patient in terms of how you use your capital. You can't we've in the past had people say, well, you must not like your stock because you didn't buy it this quarter. Well, that's not necessarily true.

Speaker 2

It depends on other things that are going on that take a lot longer than 1 or 2 months to determine how they're going to play out. So I think what you should expect is going forward, we will over time have a mix of all of these things. We will do buybacks, we will do debt pay downs and we will also hopefully buy assets.

Speaker 16

Got it. And then on a completely different tack, which markets do you feel like you're subscale in? And what was sort of different about the thesis when you entered that market versus how it's played out in terms of did you expect to there to be more organic growth in those markets or more portfolios to come up for sale or the portfolios that did come up for sale came at prices that you weren't willing to compete for?

Speaker 2

Yes. I think in the past when we first were entering certain of these markets, our view on scale was that scale is reaching a point that you cover your overhead and you produce positive EBITDA. And I think where our view has evolved is that scale is more than that. It's your relevance to the leading carriers in the market. And if you don't have that, and in particular international more than this is the case in the U.

Speaker 2

S, internationally, if you don't have that, the way that work is handed out, the way that carriers engage with providers, tower providers in this case, is influenced by the relative importance to their network that you represent. And so we have some places where we simply have small portfolios and there are much bigger players. And so we either need to figure out how to become a player, a bigger player that's more relevant to our customers or we shouldn't be there.

Speaker 16

Got it. Thanks, Glenn. I appreciate that.

Operator

Sure. Our next question comes from Batya Levi with UBS. Please go ahead.

Speaker 13

Thanks. A couple of follow ups. First on the domestic side, normal churn is still running at the high end of 1% to 2% you've laid out. Do you see some opportunity to lower that to the low end? I think some of your peers are suggesting it.

Speaker 13

And a reminder on the exposure to U. S. Seller would be good and how long you have left on that contract. And lastly, SG and A stepped down sequentially, can you talk about if that level is sustainable going forward? Thank you.

Speaker 2

Sure. The opportunity for lower domestic churn, yes. I do think that excluding of course Sprint or any other material consolidation that might take place that we would see that number trend down over time. A lot of that was made up of stuff that was smaller companies and that kind of thing. So I expect to see less and less of that.

Speaker 2

But we'll see as we get into next year and the years beyond. U. S. Cellular, we have a fairly immaterial exposure of less than $20,000,000 a year in revenue from U. S.

Speaker 2

Cellular and even obviously a smaller percentage of that that overlaps with T Mobile. So I don't think it'll be overly material, whatever happens there. And on the SG and A front, it did step down quarter over quarter, but typically the first quarter is our highest quarter, because of payroll taxes and a number of other specific things. So I think we're at a fairly normal level, but over time it will probably move up with the typical cost of living type of increases that you would expect for overhead of our type.

Speaker 13

Got it. Thank you.

Operator

Sure. And our next question comes from David Guarino with Green Street. Please go ahead.

Speaker 11

Hey, thanks. We don't often get to hear about your track record on deals, but I was wondering if you could talk a little bit about some of your recent investments like in Tanzania and the Philippines, how they fared. It would be great just to hear about actual performance in those markets versus your initial underwriting, especially as we kind of consider the capital allocation track record you have as you pursue external growth going

Speaker 15

forward? Yes. I mean it's hard

Speaker 2

to get too specific on all of that, but just touch on the ones that you mentioned. Tanzania thus far has worked out extremely well. We've had tremendous growth there that we've been very pleased with from an organic leasing standpoint. Obviously, the entry price we came in was attractive. And so the return on invested capital thus far has been tremendous in that market.

Speaker 2

In the case of the Philippines, it was a little bit of a totally different animal. There wasn't an acquisition there. That was almost all brand new builds and it's really at a fairly early stage. So I'd say as far as it's gone well, the leasing has been strong, but we have a very small portfolio and it's they're brand new sites. So we got to give that a little bit more time to see how it plays out.

Speaker 11

Okay. And then sticking with the topic on acquisitions, you might have mentioned this in the past, but just to clarify, are you more focused on macro tower assets? Or given your experience, you guys have made investments in DAS networks and data centers. Is that on the table? And then I guess you kind of carry that over to active equipment.

Speaker 11

We hear about some of that in Europe and then some fiber assets as well. Just wondering how far you'd want to stretch out that in macro towers?

Speaker 2

Yes. I mean, we're a macro tower company, so that's obviously where we spend the vast majority of our time. The other things were specific items that had ancillary strategic rationale that we were looking at, but it's not the core of what we look at.

Speaker 11

Great. Thank you.

Speaker 2

Sure. Thank you all for joining the call and we look forward to reporting our results next quarter.

Operator

That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
SBA Communications Q2 2024
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